Private credit faces another blowout! BlackRock "rarely" waives management fees as its private credit fund performs poorly.

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According to media reports on Thursday, a private credit collateralized loan obligation (CLO) under BlackRock failed a key test due to deteriorating asset quality. The world’s largest asset management company was forced to take the rare step of waiving part of its management fees to ease the default situation. This incident serves as a warning bell for the rapidly expanding private credit market.

Last October, the CLO, named BlackRock Baker CLO 2021-1, failed to pass the over-collateralization test due to a decline in portfolio value. This test measures the ratio of loan asset value to the most highly rated bonds; failing the test means that the asset value is too low relative to the bonds. According to insiders, BlackRock helped resolve the default by waiving management fees—including cash from the highest-risk tranche bonds.

This CLO, with a size of about $495 million, holds loans to multiple distressed companies. These include home renovation company Renovo Home Partners, which filed for bankruptcy earlier this month; education software provider Pluralsight Inc., which was taken over by private credit firms last year; and Astra Acquisition Corp., which filed for bankruptcy last September.

This incident comes at a time when the private credit market is showing signs of weakness. Blue Owl Capital on Wednesday halted the planned merger of two of its private credit funds, after questions over potential investor losses triggered a sharp decline in its share price.

Rare Failure of Over-collateralization Test

It is uncommon for the over-collateralization test to fail for high-rated tranches of a CLO. Such products have long been seen as resilient due to their self-correcting mechanisms—when the test fails, the system automatically diverts interest income from high-risk tranches to safer tranches.

But the problems with this BlackRock CLO are not new. According to data compiled by Bloomberg, the CLO’s highly rated bonds first failed the over-collateralization test in October last year and have since fluctuated between repair and failure. The CLO’s highest-risk tranche bonds have continuously failed the test since April 2024, prompting S&P Global Ratings to downgrade their D and E tranches last December, citing “deterioration of underlying portfolio credit quality.”

According to a report from trustee Wilmington Trust, the CLO was issued at the end of 2021, during a private credit market boom. At that time, cash-rich funds engaged in fierce competition for lending, abandoning critical protections and significantly increasing leverage—risky behavior that compounds problems when companies become distressed.

Concentration of Problematic Loans

Several loans held by BlackRock Baker CLO 2021-1 have become severely problematic. As previously reported by Bloomberg, BlackRock had valued its private debt in Renovo Home Partners at 100% of face value just weeks earlier, but quickly wrote it down to zero after the company filed for bankruptcy.

The CLO also holds loans to Pluralsight Inc., the education software provider, which was taken over by private credit firms last year. Additionally, according to trustee reports seen by the media, the CLO holds debt from Astra Acquisition Corp., which filed for Chapter 11 bankruptcy protection last September.

BlackRock’s predicament is not unique. Its recently acquired HPS Investment Partners has written down about $150 million of debt to companies affiliated with businessman Bankim Brahmbhatt to zero; these companies are currently facing fraud allegations and a federal investigation.

Market Concerns and Structural Risks

While other BlackRock mid-market CLOs—including TCP Waterman and TCP Whitney—are performing strongly, this incident has still raised questions about the broader outlook for the private credit market.

The credit market has recently been hit by the collapses of subprime auto lender Tricolor Holdings and auto parts supplier First Brands Group, sparking public blame-trading among Wall Street executives over lax underwriting standards.

The private credit CLO market continues to expand rapidly. According to Bank of America research, private credit CLO issuance so far this year has reached about $34 billion, on track to surpass the 2024 record of $39 billion. The bank expects that, in the long run, about a quarter of direct loans could end up being held by CLOs.

According to Bloomberg data, BlackRock has around 29 CLO products backed by broadly syndicated loans, with that market poised for record issuance this year. It is unclear whether the troubles of this CLO signal deeper issues in the credit market, but its performance has undoubtedly cast a shadow over the fast-growing private credit market.

Risk Warning and DisclaimerThe market carries risks, and investments should be made cautiously. This article does not constitute personal investment advice and does not take into account the individual investor's specific investment objectives, financial situation, or needs. Investors should consider whether any opinions, views, or conclusions expressed in this article are suitable for their particular circumstances. Investment decisions are at the investor’s own risk. ```